Vital Healthcare Property Trust's manager says it is reducing its base fees and adopting a tiered structure but is adding a raft of new fees not mentioned in the current trust deed, making it unclear whether overall fees will go up or down.
Independent chair of the manager, Clair Higgins, has also resigned, effective immediately, and will be replaced by the manager's president Bernard Crotty.
Canada-based NorthWest Healthcare Properties Real Estate Investment Trust bought Vital's management contract for $11.5 million in 2011 and has since collected well over $100 million in fees, including $22.1 million in the six months ended December.
The change in the fee structure follows agitation from Vital's unitholders who accused NorthWest of treating Vital like a piggy-bank.
NorthWest is also permanently giving up its right to fire independent directors at will and its right to unilaterally increase the fees it charges Vital.
NorthWest says that one of the two independent directors on the five-person board will hold a casting vote "to ensure that board decisions continue to benefit from a majority of independent votes."
NorthWest says it will reduce its base fee from 0.75 per cent of gross assets to 0.65 per cent for the first $1 billion, to 0.55 per cent for the second billion dollars and 0.45 per cent for the third billion.
It will charge a flat 0.4 per cent for assets above $3 billion.
It is also changing its incentive fee to 10 per cent of the increase in net assets – previously it was charged on gross assets in the previous three years with the total of the base and incentive fees capped at 1.75 per cent of gross assets.
NorthWest has committed to buying A$1.26 billion worth of property currently owned by ASX-listed Healthscope, a transaction it will likely cause Vital to be part of, although it hasn't done so yet, and that would mean raising more capital for Vital, thus issuing new units.
While the change in the incentive fee is an improvement in that NorthWest will no longer receive an incentive fee as a result of causing Vital to increase its borrowings, it doesn't address what will happen if more Vital units are issued and net tangible asset backing per share is diluted.
Vital's gross assets at Dec. 31 were $1.88 billion while net assets were $998.5 million.
While the current trust deed doesn't mention other fees, NorthWest charged Vital $10.1 million in the six months ended December on top of its base and incentive fees, amounts that were labelled "expenses" and a note to the accounts said they included "property-related related costs, acquisition and development fees and other operating expenses."
NorthWest's statement announcing the changes doesn't mention any cap on fees and includes a list of other fees not mentioned in the current trust deed.
These include an acquisition fee of 1.5 per cent of the purchase price and a disposition fee of 1 per cent of the sale price.
NorthWest will also charge leasing fees with a minimum of $2,500 per lease, 11 per cent of the annual rental for leases with terms of less than 3 years, 12 per cent of annual rental for three-year leases and another 1 per cent for each additional year up to a maximum of 20 per cent of annual rental.
Because Vital's properties are medical in nature and include a number of hospitals, its leases tend to be longer-term than for other property leases. The weighted average lease term at Dec. 31 was 18 years, suggesting this new fee will provide a lucrative income stream.
NorthWest will charge 50 per cent of the above fees on lease renewals.
It will also charge rent review fees, property management fees, facilities management fees and development fees of 4 per cent of committed spend – the manager has committed Vital to spending $223 million on developments within its existing portfolio over the next three years, including $80 million before June 30.
NorthWest will also charge a project management fee of 2 per cent of committed spend "where Vital is the project lead" and 1 per cent where it isn't the project lead but has an oversight role.
NorthWest says the new fee structure is based on a research report by accounting firm EY which included feedback from key unitholders representing about 40 per cent of Vital's units, not including NorthWest, which owns nearly 25 per cent. NorthWest says it won't release the EY report and says it was for board purposes only.
"The manager's independent directors confirmed that they believe the proposed new governance and fees structure is in the best interests of, and on balance fair and reasonable to, unitholders in the circumstances," NorthWest's statement says.
"The independent directors said that they felt that it 'provides Vital with a solid basis from which to move forward so that our focus can fully revert to the generation of superior financial performance'," it says.
"This matter has been fully and duly considered, recognising the responsibilities of the board, of the manager and the role of the independent directors."
The fee review was conducted by the manager's full board, going against its own board charter which says such matters should be conducted by a committee of independent directors.
Vital's net distributable income fell 18.7 per cent in the six months ended December, even as the manager's fees jumped nearly 75 per cent, and the manager borrowed to lift the first-half distribution to 4.38 cents per unit from 4 cents previously.
NorthWest says it "is now in a position to focus on the Healthscope real estate opportunity and potentially agree terms with NWH REIT that could see Vital participate in the Healthscope transaction. The board expects to provide a further update on the extent of any participation in the Healthscope opportunity by the end (of) April," its statement says.
Because Vital is a trust, it doesn't have any directors or officers of its own so NorthWest is essentially saying it will negotiate with itself over Vital's participation in the Healthscope deal.